Fund Managers Turn Upbeat on Economy: Merrill Lynch Survey

Fund managers are becoming more confident about the prospects for global economic recovery, with an index of sentiment notching up its biggest monthly gain in more than three years, a survey by Bank of America Merrill Lynch shows.

Pro-stimulus talk from European officials has boosted the outlook for the euro area in particular, the survey showed.

Fifteen percent of the 173 fund managers who took part in the survey in the first week of August believe that the global economy will get stronger in the coming 12 months. This is a monthly swing of 28 percentage points, the largest leap in confidence since the April-to-May period in 2009, when economies emerged from the global recession.

Much of the optimism stemmed from hopes for fresh measures from central banks, especially the European Central Bank (ECB) , after President Mario Draghi said at the end of July that the ECB was ready to do whatever was necessary to save the euro from a debt crisis that has seen borrowing costs in countries such as Spain jump to unsustainable levels.

Draghi’s tough rhetoric has been followed by comments from U.S. Treasury Secretary Timothy Geithner, German Finance Minister Wolfgang Schaeuble and Chancellor Angela Merkel, as well as French President Francois Hollande, helping to shore up confidence in markets that policy makers will take decisive action to end the debt crisis.

“August’s surge in confidence seems to be more a triumph of policy projection and potential than positive economic data,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. “As indicated by the survey, the risk is now that inaction by policy makers would lead to a negative reaction in global markets.”

Draghi’s comments have boosted global equity markets; however the initial optimism has been tempered slightly as focus turns to what action policy makers will now take.

Nonetheless, 38 percent of respondents in the survey said they expected the ECB to act during the third quarter, up from 29 percent in the July survey. The proportion of fund managers ruling out more quantitative easing by the ECB meanwhile halved to 9 percent.

Expectations of a policy response by the ECB led fund managers to be far less bearish on Europe. About 48 percent of respondents see the European sovereign debt crisis as the biggest risk to the global economy, down from 65 percent a month earlier. Only 13 percent have an “underweight” rating on European equities, the best reading since May 2011 and down from 26 percent in July.

The pan-European STOXX Index has chalked up 10 consecutive weeks of rises, propelled to levels last seen in late March.

Upbeat on China

According to the BofA Merrill Lynch survey, fund managers are the most positive about China’s growth prospects since November, with 14 percent believing that the world’s second-largest economy will improve, signaling increased optimism that China will be able to avoid a hard landing.

Overall, a net 23 percent of the regional panel expects the global economy to weaken in the coming year, down from a net 33 percent a month ago.

While concerns over the euro zone and China eased, worries about the U.S. ‘fiscal cliff’ climbed, with about 26 percent of fund managers saying this was the biggest risk to the global economy, up from 19 percent in July. The fiscal cliff refers to a series of tax hikes and spending cuts that will kick in on January 1, 2013 if the U.S. Congress and President Barack Obama do not agree on proscribed deficit-reduction targets by the end of the year.

Economists estimate that the damage to the U.S. economy could exceed more than half a trillion dollars and shave several points off GDP growth.

“Significantly, there are more investors wanting to underweight U.S. equities than euro zone equities,” BofA Merrill Lynch said in the statement.